Final Paper Health Care Reform 2012

Health care reform: Restructuring the Health Care Industry, and Reshaping Health

Care Supply Management

An Independent Learning Project Presented by

Michelle Christina McDonald

to

Dr. John Chittick

Faculty Advisor

in partial fulfillment of the

requirements for the degree of

Master of Management

Cambridge College

Chesapeake, Virginia Campus

Cambridge, Massachusetts

April 2012

This is an unpublished Independent Learning Project

in which copyright subsists

© Copyright by Michelle Christina McDonald

April 2012

All rights reserved.

Since this manuscript is not intended for publication, some of the charts, graphs, photos,

pictures, and drawings were used without permission of the authors. This copy is not for

distribution to the public.

ii

Acknowledgments

I feel truly blessed to have such a wonderful group of supporters, family, friends, and

co-workers. They all have been instrumental in the completion of this project.

To my husband, he has to pick up the slack, without complaint, and support and

understand my plight from the beginning. He stood by me when my life turned upside

down a couple years ago, thank you honey for being my rock.

To my kids, I hope that you follow in my footsteps and realize that the only thing

holding you back is, YOU! I hope that all of you find your calling in life, and follow

your dreams and aspirations (but of course with a back-up plan (wink).

To my friends, all of you have been very supportive, and I am glad that you chose

me to be in your lives.

To my co-workers and manager, during the last year I have learned so much from

each and every one of you. In particular, thank you to my director/manager. She has

been an excellent teacher and mentor, and has been an instrumental in sharing with me

her knowledge of Health Care Industry, and Health care supply chain management. To

her, I am greatly indebted.

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Abstract

In this Independent learning Project (ILP), the author discovered how the

implementations of the Health care reform Initiatives have affected the health care

industry that is continuously evolving with the newly spurred mergers, acquisitions, and

partnerships. In an effort to decrease medical costs, and conform to the new Patient

Protection and Affordable Care Act, hospital management and industry corporations are

re-evaluating current supply chain operations, and reacting to the challenges of the Health

care reform that was implemented on March 23, 2010.

Keywords: Healthcare Supply Chain Management, mergers, and acquisitions,

partnerships, healthcare reform, physician preference items, benchmarking, due diligence,

Medicare, Medicaid, consolidations, GPOs, contracting, private contracts, VHA, cost

saving strategies in healthcare, Federal Trade Commission’s healthcare concerns,

transformational, healthcare cost reductions, and non-profit healthcare

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Table of Contents

Abstract.............................................................................................................................iv

Introduction........................................................................................................................5

History of Health care reform..........................................................................................5

Modern Health care reform.............................................................................................5

Literature Review..............................................................................................................5

Health care reform after 2010..........................................................................................5

Mergers, Acquisitions, and Partnerships.........................................................................5

Benefits and Risks of Consolidation................................................................................5

Supply Chain Management..............................................................................................5

Information Technology..................................................................................................5

Successful Consolidation.................................................................................................5

Health care GPOs and Benchmarking.............................................................................5

Summary..........................................................................................................................5

Methodology.......................................................................................................................5

Data Review.....................................................................................................................5

Survey Results:................................................................................................................5

Data Analysis:..................................................................................................................5

Conclusion..........................................................................................................................5

Statement of Learning.......................................................................................................5

Bibliography.......................................................................................................................5

v

Appendix.............................................................................................................................5

A. Healthcare Reform Time-Line...................................................................................5

B. Statistics.....................................................................................................................5

C. LinkedIn Comments...................................................................................................5

D. Glossary of Abbreviations.........................................................................................5

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Health Care Reform Restructuring the Health Care Industry

1

Introduction

With the implementation of Health care reform (which news reports now commonly

refer to as Obamacare), many small community hospitals and private practice clinics are

considering merging with larger Health Care Networks (HCNs) and Integrated Delivery

Networks (IDNs). The situation has created a need for the larger networks to thoroughly

research not only their current supply chain, but also the implications that mergers will

have on personnel, resources and vendors. Mergers, acquisitions and partnerships can

take countless months or years to completely research and ultimately implement. Many

questions go unanswered until due diligence begins, and the communication lines are

allowed to open.

Mergers and Acquisitions, Health Care, and Supply Chain management are often

very popular literary subjects, and usually are not discussed simultaneously in the

literature. Yet the supply chain is a crucial part of the Health care industry , and the

effects of consolidation not only distresses the hospitals or networks involved, but also

impacts vendors that regularly supply products and services to them.

For purposes of the discussion in this ILP, “health care” as two words refers to

actions by people who work in the “healthcare” system and by patients who receive it;

“healthcare” as one word refers to a system to offer, provide, and deliver health care.

Healthcare is the system used by the healthcare industry; when referring to the corporate

entity, the Healthcare Industry is the preferred spelling.


2

History of Health care reform

Throughout history, healthcare reform has been a hot issue for political candidates

and the public due to the ever-increasing cost of health care, the fear of not having access,

and the political gain that can be accomplished by saving healthcare dollars. In 1912,

President Theodore Roosevelt’s campaign endorsed his Progressive Party’s platform that

included a national health insurance program, which began the initiative of “Health care

reform” in the United States. In 1932, President Franklin Roosevelt (fifth cousin to

President Theodore Roosevelt) created an advisory committee that introduced The Social

Security Act that initially proposed a national health insurance provision. Social Security

was adopted in 1935 but the law did not include the health care insurance provisions. Yet

President Roosevelt proposed during his 1944 State of the Union address that Americans

should, “have the right to adequate medical care, and the opportunity to achieve, and

enjoy good health” (The long, long road to national health reform (a short history), 2010).

When President Roosevelt passed away in 1945 his successor, President Harry S Truman,

continued to lobby for the healthcare insurance provisions; efforts which resulted in

grants to provide public health. Congress passed the Hospital Survey and Construction

Act (also known as the Hill-Burton Act) in 1946. The Act subsidized new hospital

construction, and required hospitals to provide charity care for those that could not afford

health care (The long, long road to national health reform (a short history), 2010). In

1948, the United Kingdom’s Healthcare Service launched a similar plan for all citizens of


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the U.K., the world’s first major socialized health care system (the National Health

Service) to cover all its citizens equally. It is important to note that the present

Obamacare debate is not about such an expansive system because many Americans

would not be covered by one government healthcare system (private choices are

allowed).

In 1962 President John F. Kennedy addressed the issue of health care for seniors, the

prototype for today’s Medicare program, which was robustly opposed by commercial

insurance companies and medical professionals. In the wake of his assassination in 1963,

his successor, Lyndon B. Johnson took over the fight (The long, long road to national

health reform (a short history), 2010). In 1965, President Johnson signed the Medicare

bill into law with former President Truman by his side. Soon after the Medicare bill was

approved, Canada created its own Medicare system that is similar in key parts to both its

American counterpart and the U.K.’s plan.

In 1973, President Nixon signed into law a new program to generate health

maintenance organizations or as it is commonly known today, HMOs. Later Congress

approved the Emergency Medical Treatment Act in 1986 that obligated hospitals to

screen and stabilize all emergency patients regardless of their ability to pay. The

rationale was that if federal funds were helping to finance the country’s hospital system

then wider public service was fair. In 1993, President Bill Clinton, along with his wife

Hillary Rodham Clinton, created the “Managed Competition” plan that would have


4

allowed private insurers to compete in a regulated market. This proposal (a.k.a.

Hillarycare) was heavily criticized for being too ambitious and was not passed by

Congress. However, it laid the seed that sparked the State Children’s Health Insurance

Program that expanded health care to poor children in low socioeconomic neighborhoods

of hard-pressed cities. The Health care reform of the 1990’s focused primarily on urban

areas, including consolidating hospitals and healthcare plans to expand the referral base,

in contrast to the healthcare reform today, which is based on specialty care and rural

providers (Kiser, 2011). Health care reform legislation has created transformational

opportunities and difficulties for hospitals.

Modern Health care reform

The reform initiative is designed to not only overhaul the care delivery system, but to

address hospital tax-exempt statuses and pricing transparencies. The current U.S.

healthcare system is set up as a volume reward payment system with little or no concern

for medical outcome or re-admission. U.S. Health care cost is high while the quality of

health care is low in comparison to most other developed countries. The legislation is

designed to change the incentives from volume-based to quality-based medical care

(Mulvany, 2010).

The Center for Medicare & Medicaid Services (CMS) has already implemented a

value-based system that reduces Medicare payments to hospitals with extremely high


5

volumes of re-admissions that are avoidable, by reducing Hospital-Acquired Conditions

(HACs). In addition to the CMS efforts, the Secretary of the Department of Health and

Human Services (HHS) is responsible for developing a procedure for reviewing all

hospital performances, rewarding those hospitals that meet or exceed the guidelines that

the CMS initiates (Mulvany, 2010).

The Patient Protection and Affordable Care Acts were approved on March 30th, 2010,

and were signed into law by President Barack Obama (Patient Protection and Affordable

Care Act, 2010). This act is effective in conjunction with The Health Care and Education

Reconciliation Act or 2010. The acts not only establish the legislation that is set forth in

regards to Health care reform, but also institute the provisions, time-line and penalties

established for the Healthcare Industry as a whole (Patient Protection and Affordable

Care Act, 2010). Currently, the Health Care Reform Act is under fire (spring, 2012).

The Supreme Court is considering whether or not the federal Act is constitutional in

whole or in part. The possibility of “starting over” due to its possible repeal would result

in astronomical repercussions in the healthcare industry since wheels have already been

put in place and “billions of dollars have been invested since the law passed in 2010

(Thomas & Abelson, 2012).”


6

Literature Review

Health care reform after 2010

Health care reform is considered to be a catalyst that has spurred an increase of

consolidations in the Healthcare industry. In a recent survey of hospital leadership,

eighty-six percent of those surveyed predicted that due to Health care reform, mergers

and acquisition will increase considerably during Health care reform implementation

(Munich-Pourshadi, 2010).

Healthcare Reform is still in its infancy, and will continue to evolve as the healthcare

industry is affected and reacts to the changes.

Starting in 2013, hospitals with higher-than-projected 30-day re-admission

rates for heart attack, heart failure, and pneumonia will have all of their

inpatient Perspective Payment System (PPS) payment reduced, which will

result in an estimated payment reduction of $7.1 billion over 10 years

(Mulvany, 2010).

In 2015 the list of conditions will increase and will include many cardiac surgical

procedures, as well as vascular surgeries. Calculations will also be tabulated and posted

by the CMS, which will include all re-admission rates for chosen conditions. Health care

value-based purchasing will begin in 2013; value-based care is directed towards acute,

inpatient care at PPS hospitals. The information is now collected for conditions of this

nature by Medicare. The value-based program is funded by money saved from Medicare

adjustments (Mulvany, 2010). By 2015, the Healthcare laws will impose a pecuniary


7

penalty on hospitals exceeding the expected, risk-supported rates. Hospitals and/or

networks that make up the top 25% will see a 1% reduction in their inpatient PPS

payments, which will save Medicare nearly $1.4B within 10 years. The program will

utilize conditions that are currently part of the CMS’s Hospital Corporation of America

(HCA) inpatient PPS payment policy (Patient Protection and Affordable Care Act, 2010).

In the future, the laws have the real possibility to drastically overhaul hospital care.

Pilot organizations that test combined costs and Accountable Care Organizations

(ACOs) may be able to help hospitals assume and realize financial gains. If hospitals

can work with physicians as well as post-acute providers, the partnership should not

only improve quality, but lower costs as well (Mulvany, 2010).

In 2013, a voluntary Medicare consolidated payment pilot program will begin. The

five-year program will start three days prior to hospital admission and end 30 days

after discharge, including post-acute care, physician services, inpatient care, outpatient

care, and additional services deemed necessary by the HHS secretary. Hospitals,

physicians groups, nursing facilities, and home healthcare facilities are allowed to

apply to participate (Mulvany, 2010). The initial pilot program will focus on 10 health

conditions. The conditions will consist of a blend of acute and chronic issues, surgery

cases, and medical cases where there seems to be momentous prospects to not only

vastly develop the quality of health care, but reduce cost and lessen re-admission rates

and post acute care.


8

In 2016, if the pilot is successful, there could be a possibility of expansion to

include more areas of health care, cost and improving quality. In addition to the HHS

Secretary’s pilot program, there are two other pilot programs that hope to achieve

similar results, the Medicare program, and the ACO program. The Medicare pilot that

began in January of 2012 included eight states (Patient Protection and Affordable Care

Act, 2010). The ACOs pilot program is a long-term program that tests the capability

of ACOs by attempting to tie reimbursements to quality health care improvement and

cost reduction by bundling payments. Physician groups, Physician joint venture

organizations, and hospitals that employ physicians are permitted to participate in this

pilot program (Patient Protection and Affordable Care Act, 2010).

Mulvany stated “that to be eligible to participate, providers must agree to the

following”:

1. Become accountable for the overall care of their Medicare

beneficiaries

2. Participate for a minimum of three years

3. Have a legal structure enabling receipt and distribution of bonuses

4. Provide information on physicians practicing in the ACO

5. Have a management and leadership infrastructure in place

6. Define processes to promote evidenced-based medicine and patient

engagement


9

7. Meet patient-centeredness criteria determined by the HHS secretary

(Mulvany, 2010)

The HHS Secretary is required to set the minimum savings required by the ACO,

and establish the requirements to come eligible to earn the incentives payments.

ACOs must meet the minimum savings required for the clinical outcomes, cost of

care, patient care, caregiver perspectives/opinions of care, and deployment of care

(Mulvany, 2010).

Many hospitals have non-profit status, which is a particularly sensitive subject for

lawmakers. In March of 2010, tax-exempt hospitals came under more scrutiny, and the

government watched closely. Hospitals are now required to conduct a community

health needs assessment (once every three years), and are accountable to the IRS to

certify that they are meeting community needs. Tax-exempt hospitals are also required

to generate a fiscal assistance plan and policy that must use, “reasonable efforts to

establish if a patient qualifies for charity care (Mulvany, 2010). The first assessment

was due by March 23, 2012, and if not completed on time, will result in a fine of

$50,000 to the non-compliant hospital. In addition to the assessment, the hospital is to

report to the IRS how they meet the acknowledged needs of the public. This will be a

financial statement that includes a description of the needs that must be addressed and

the reason why the needs were not addressed during the three-year period (as well a

financial audit statement of the hospitals community benefit conduct). The Department

of the Treasury will compile the results of the submissions from the hospitals to report


10

to Congress in regards to the charity care that is provided, and the costs associated with

the community benefits provided by the tax-exempt hospitals (Mulvany, 2010).

The hospitals are required to implement and advertise their fiscal assistance policy

which must: address eligibility, establish amounts charged to perspective patients for

care, provide instructions on how to apply for charity care, and institute actions that

could be taken for non-payment. Also, hospitals cannot inflate charges, and will be

required to charge the same amount regardless of insurance charges, unlike today’s

billing practices that allow hospitals to over-inflate prices for those that do not have

insurance. Hospitals are also required to publicize the list of charges for all hospital

services and items provided, which will also include charges to Medicare MS-DRG.

The HHS Secretary is creating a plan that will establish reporting standards and verify

compliance (Patient Protection and Affordable Care Act, 2010). MS-DRG is the cost

allocation method that is used by Medicare to determine, “the ratio of costs to charges

that are calculated for each patient (Tyson, 2010).”

Hospitals that are prepared, and acknowledge the new guidelines quickly will

benefit most from the reform. Those that do not, will not only lose funding and

government support, but will be fined heavily for non-compliance. First and foremost,

hospitals must understand and study the laws and guidelines set forth in the Health

Care Reform Act. Hospitals will need to make comparisons utilizing revenue versus

cost impact to establish how it will impact the bottom line. Senior executives must

recognize exposure and opportunity and create a strategic plan to identify possible


11

negative impact, and acknowledge areas of opportunity (Mulvany, 2010). For many

organizations, this strategic plan may include mergers, acquisitions, and partnership

opportunities (Kiser, 2011).

Mergers, Acquisitions, and Partnerships

Mergers more often than not occur when organizations of the same size merge

together to become a larger organization. Acquisitions usually occur when bigger

organizations acquire smaller organizations, and partnerships involve two or more

organizations that combine their efforts to work together for a common goal (Saraan,

2008).

Many small physician groups and hospitals have joined with larger hospital networks

and IDNs. This shift has triggered a trend of mergers similar to those of the mid-1990’s

during the Clinton Administration’s attempt to overhaul healthcare. During the last 24

months, several hospitals have merged or signed letters of intent to merge with larger

health systems. Allan Baumgarten, a Minneapolis health care consultant stated, “I would

say there’s definitely a trend… I see it here and in markets across the country” (Kiser,

2011). Baumgarten publishes annual reviews of the health care markets in 12 states. He

also stated that, “entire health systems are being absorbed, which is creating some

interesting situations; the traditional geographic boundaries in health care are eroding”

(Kiser, 2011). Price Waterhouse began a series of discussions in 2010 in conjunction

with Health Leaders Media to determine the effect that Health care reform has had on the


12

healthcare industry, and the repercussions that have occurred (Elek, 2010). The

following advice was given to healthcare organizations:

Healthcare organizations need to begin by weighing their options for how

they will continue to fulfill their mission of care five or ten years from

now. Assess up front whether a particular merger, acquisition, or

partnership is financially, operationally, and culturally advantageous to the

organization and the community. If the deal makes sense, recognize that

mutually advantageous deal making in today’s environment requires

increased due diligence by both the buyer and the seller, and simultaneous

attention to the integrate operations. (Elek, 2010)

In the 2010 survey by Price Waterhouse, 83% of healthcare investors believed that

healthcare reform would trigger consolidation in both the healthcare and insurance

industry (Elek, 2010). Mergers are obviously not new to the healthcare industry as they

begin and change dependent on the current legislation, political gain, and government

reform. From 2002 to 2009, mergers had leveled off, but with the passage of the Health

Care Reform Act in 2010 consolidation are inevitable for smaller hospitals to stay afloat.

Eighty-six percent of hospital leaders predicted in a recent survey that they expected an

increase in acute care mergers and acquisitions (Zuckerman, 2011). There are many

trends and conditions that have began to re-structure the healthcare industry. Alan


13

Zuckerman, a healthcare executive and editor of Leading Your Healthcare Organization

through a Merger or Acquisition stated,

Executives will face the most challenging experiences in their healthcare

careers due to the huge number of complex issues and considerations, all

of which strain organizational leadership and involve highly sensitive

decisions given that continued economic uncertainty and other potential

challenges lying ahead in the wake of healthcare reform, every healthcare

organization in the country is likely to step back and reflect about whether

they might benefit by seeking new opportunity to integrate with other

healthcare organization, many will have no choice but to move from

reflection to action. (Squazzo, 2010)

In addition to mergers and acquisitions, partnerships have also scattered the health

care landscape. Late in 2011, three major healthcare networks formed a strategic

partnership called the MNS Supply Chain Network. The partnership included MedStar

Health (Columbia, MD), Novant Health (Winston, SC), and Sentara Healthcare (Norfolk,

VA). The three systems spend an aggregated $3 billion yearly on supplies and services.

The executives of the networks involved believe that with the partnership, their buying

power will result in a 2% over all savings and calculated savings of over $60 million

annually. Ed Robinson, MedStar’s vice president of performance improvement and

operational sustainability stated, “We will be able to take the leverage between three


14

large systems, which generally speaking will get a lot more attention from the supplier

community. The stakes will be higher, and they will respond with more competitive

proposals (Fischer, 2011).”

Last year alone, the three organizations collectively booked $12.5 billion in

revenue. The organizations combined own 32 hospitals throughout the mid-Atlantic

region. The consolidated venture was handled by VHA Inc., a Group Purchasing

Organization (GPO) that will act as a data intermediary between the three organizations

(Fischer, 2011).

In 2011, over 86 hospitals and healthcare systems’ mergers and acquisitions have

taken place. This is an increase of 12% from 2010. This increase has not gone unnoticed

by the federal government; the FTC (Federal Trade Commission) is watching very

closely to merger and acquisition transactions. The FTC’s main concern is with non-

competitive mergers that resemble hostile competitor’s take-overs, without additional

bidders or interest given to other parties (Dunn, 2012). The FTC announced intentions to

revamping pre-merger filling requirements to try to cut down on non-competitive

transactions (Dunn, 2012).

Health care reform has completely changed the healthcare industry, as well as

industries that are dependent on it. The insurance industry has become more

consolidated; healthcare capital markets have changed; there has been a drastic increase


15

in expenses and decrease of reimbursements; there are more workforce shortages due to

an aging workforce; and financially strapped providers have increased.

The Insurance Industry has begun to shrink. Colossal restructuring and consolidation

have resulted in two of the largest insurance companies now having a combined market

share of over 70% in 24 of 43 states reviewed by the American Medical Association

(Zuckerman, 2011). This is creating a great imbalance and an oligopolistic insurance

landscape due to the insurance companies controlling great national and regional

provisions. In effect, this transformation has given the larger insurance providers

increased bargaining power in regards to contracting with providers, and gross leverage

to decrease rate increases (Zuckerman, 2011).

New technology, the need for higher quality, increased safety, and patient demands

have fueled the change in capital market needs. Only the larger hospitals and IDNs can

afford to keep up with the times and provide patients with the “next best thing”. Smaller

hospitals are forced to either merge with a larger hospital or network, or refer patients

outside of their network (Zuckerman, 2011).

Cost inflation has outpaced rate increases throughout the last decade. Unemployment,

non-compensation, and under compensation have increased while reimbursements have

decreased and are now capped. Patricia Tyson, Vice President of VHA LLC has

commented, “The need to confront reimbursement changes… providers have made


16

efforts to reduce cost, but this has caused a domino effect resulting in their decreasing

financial performance and ultimately financial leverage” (Zuckerman, 2011). The shift to

value-based health care from volume-based healthcare is inevitable (Tyson, 2010).

An aging work force and shortages cannot keep pace with the rising volumes and

staff needed to provide care to patients. Recruitment has changed from a local

employment search to going after national and sometimes international applicants. This

shift has resulted in widening the gap even further for smaller hospitals that do not have

the financial ability to increase recruit funding (Zuckerman, 2011). New physicians tend

to prefer employment in larger groups that include regular work hours, staff coverage,

and leisure time availability. In addition to the fore-mentioned recruiting issues, smaller

hospitals are not being considered by new physicians because they lack the security that

they desire (Zuckerman, 2011). Wages at larger hospitals and IDNs are also much more

appealing to new physicians, and translate to a financially secure hospital.

The financial ability of a hospital is extremely important in many aspects. First and

foremost is the hospital or IDN’s credit worthiness with increased strains on finances,

demand for new technology, workforce shortages, increased expenses, and healthcare

reform. Smaller hospitals are struggling to keep up. The gap is expected to widen even

more; as a result, smaller hospitals will either fail, or be forced to consolidate with a

larger more financially stable organization (Zuckerman, 2011). Smaller hospitals often

do not have the buying power of the larger hospitals and IDNs that leads to the larger


17

organization receiving more attractive pricing and increase revenue, versus smaller

organizations that will ultimately lose revenue (Tyson, 2010).

Benefits and Risks of Consolidation

The decision to consolidate or integrate with another organization cannot be taken

lightly. There are many factors that need to be considered, and the most successful

integrations involve not only due diligence in regards to the new partnership, but aligning

both organizations’ visions in regards to the integration. Quality improvement,

improved care, capital cost avoidance/access, cost reduction, access to staff/personnel

and expensive technology, expanding services, and revenue enhancement are all

advantages or benefits that result from integration.

Quality and safety improvements can occur when sharing best practices, clinic

protocols, implementing new technology, upgrading software, and standardizing systems

and process to improve care. Clinical feedback in regard to the needs of vulnerable

patient’s care can increase the collaborative effort by introducing ground breaking

delivery models and /or alternatives to current delivery methods (Zuckerman, 2011).

One of the largest expenses for any hospital is capital equipment. There is an

enormous opportunity to consolidate capital purchases for the integrated activities to

produce not only cost savings but also improves access and borrowing terms, in

particular, for the smaller hospital. In addition to the capitol opportunity, there is also


18

opportunity in overall cost reduction due to supply chain integration and product volume

increases (Zuckerman, 2011). That means with volume increase, it will normally result

in product cost decrease. Supply chain integration in an integral key to merger success.

The newly consolidated organization will have more access to personnel (as discussed

earlier) as well as access to more specialized technology and expensive assets. In

addition there becomes in increased opportunity to amplify savings by combining vendor

services. With an expanded network, hospitals have the possibility of meshing current

contracts, and lowering overall service contract spend for not only the smaller hospital

but the larger hospital or IDN. Revenue enhancement can also be realized by expanding

services, coordinating bill collection, and contracting (Zuckerman, 2011).

Some of the risk associated with mergers include loss of local control, reduction or

elimination of services, reduction or elimination of personnel, unrealistic expectation and

goals and potential loss of local/community support, Both the benefits and risk must be

taken into account when deciding whether or not to participate in any type of integration.

Smaller hospitals usually are integral parts of their communities; one of the biggest

fears for these hospitals is losing local control and ground in their community. It is

thought that larger organizations tend to be “insensitive” and not “in tune” with their

customer’s needs and desires. This concern can be problematic, especially in hospitals

that are heavily rooted in the community and do not want to lose their footing. In


19

addition, loss of philanthropic support that is connected with the pride and emotional link

associated with the “community” feel of hospital must also be considered (Zuckerman,

2011).

Reduction and elimination of services and personnel could also be a possibility in a

merger or integration. Services may be consolidated with the “larger” organizations

service plans, resulting in a negative effect on the local economy and local vendors by

either eliminating the need for service, or forcing them to take on a much smaller role in

the hospital. Unavoidably, doctors and hospital staff positions may be reduced or

eliminated due to the needs to the new organization (Zuckerman, 2011).

Some hospitals may look at the larger combined organization as being a “savior” or

“hero” that is going to heal all the organizations “ills”, and may have unrealistic

expectations of the outcome of the integration. Leaders may expect unattainable results,

and may become disappointed when aspirations are not achieved. Leaders in both

organizations may also become overwhelmed leaving the organization as a whole

unmanageable and disorganized. The result will be decreased performance and customer

service satisfaction (Zuckerman, 2011).

One of the most important factors to merging health care supply chains is successfully

consolidating and reducing cost on physician preference items. Admittance and care are

controlled by physicians; they directly impact utilization of equipment, supplies, service,


20

and staff (Tyson, 2010). If consolidated hospitals cannot agree on a plan of action to

control wastefulness, inconsistent or redundant behavior, cost will increase due to lack of

standardization. For example, for each surgical case admitted, tools and supplies are

required. Physicians are similar to artists who choose their preferred tools carefully

before beginning their masterpiece (Goodroe, 2010). This wide disparity ultimately will

drive up cost, even in the most efficient hospitals, and is increasingly made more difficult

when combining two or more organizations that have specific physician preference items

already established for their particular organization (Goodroe, 2010).

Many organizations may delay merging or be acquired at the last minute, essentially

treading water to stay afloat, while others will choose to be more proactive and conduct

the research necessary to forge a strong partnership. Either way, the most important part

of the whole transaction should be the shared vision of the combining organizations as

well as discovering what the partnership will accomplish.

Supply Chain Management

There are many key areas to consider when analyzing consolidation of the supply

chain. Inventory management, order management, procurement, logistics, supply chain

planning, and return/recall management must be considered. Inventory management

keeps the optimum stock levels needed for the hospitals products needed to be available

and in stock at all times (Unknown, Top 15 Supply Chain Management Software

Vendors REVEALED, 2011). While many large hospitals and IDNs distribute to their


21

network hospitals, some smaller hospitals set up JIT (Just in Time) contracts with

vendors to deliver Par level items (Items split by departmental orders) to the hospital at

particular intervals throughout the day or week. This will cut down on inventory required

on hand, but can increase overhead cost to the hospital as a percentage on overall

spending on products delivered. Purchase orders are placed continuously throughout all

hospital systems, small or large by departments. The orders are then placed by

purchasing staff, and authorized by the established approval matrix. Order management

usually includes automated order entry, supplier scheduling, pricing, and product

information (Unknown, Top 15 Supply Chain Management Software Vendors

REVEALED, 2011). Not all orders placed are purchased under a contract or purchasing

agreement. Those items that are purchased outside of contracted agreements should be

reviewed and considered during possible contract implementation or review to add to

existing contracts with vendors. It is important that purchasing and accounts payable

software is integrated in the order placement software, to ensure invoices are paid

correctly and on time.

Logistics includes warehouse management, transportation and distribution channel

coordination (Unknown, Top 15 Supply Chain Management Software Vendors

REVEALED, 2011). Transportation and distribution channels may be completely

different dependent on geographic placement and whether or not there is a JIT system in

place.


22

Returns and recall management encompasses items that are defective or recalled.

There are several different programs that offer assistance in detecting defective products

and recalled products that effect supply chain operation. It is extremely important that

records are kept on all products to ensure that when products are deemed defective, or

recalled by the vendor or the government, there is an accurate tracking system to remove

items from the shelves, and replace them with a comparable, non-defective or recalled

substitute item.

Information Technology

Today’s Supply Chain Managers rely heavily on Supply Chain Management Software

to streamline operations, and maintain efficiency.

An efficient and agile supply chain is critical to success. Companies must

be able to quickly respond to the rapidly changing needs of customers,

while keeping the cost of goods produced down to increase profit margins

and ensure maximum profitability. Supply Chain management (SCM)

software can help business achieve this by enabling them to better predict

demand trends, negotiate the best possible deals with suppliers, optimize

inventory levels, and better coordinate distribution channels (Unknown,

Top 15 Supply Chain Management Software Vendors REVEALED,

2011).


23

Thorough research of the supply chain needs and capabilities must be completed before

choosing a software application for Supply Chain Management. Healthcare’s rapid and

changing intricate supply chain demands may require a large investment in Information

Technology (IT) in order to keep up the pace (Barlow, 2011). Smaller hospitals usually

have thousands of line items to administer, while larger hospitals and IDNs have tens of

thousands of line items to manage. During mergers and acquisitions, information

technology is paramount. Coordinating information sharing, setting up integration

crosswalks, and developing solutions for IT problems will be instrumental to the success

of the new partnership. Solutions may be needed to fully integrate supply chain software

functions that may include a “cloud” or central database for a fully integrated supply

chain approach. Full integration of the supply chain’s software will be used to measure

and achieve the goals of the combined organization, which should improve quality and

operating efficiencies, and allow for full view of contracts, pricing, and all logistics

(Unknown, Top 15 Supply Chain Management Software Vendors REVEALED, 2011).

Successful Consolidation

There are two key elements associated with successful consolidation in today’s health

care environment. The first key element is accumulating data to uncover where waste

exists, and the second is allowing physicians to increase clinical quality while using the

data compiled to decrease costs while aligning the hospitals’ and physicians’ priorities

(Goodroe, 2010). This can be a daunting task, especially if the success of the merger is

based on the savings of the supply chain. Benchmarking is a very important tool in the


24

supply chain manager’s toolbox. By accessing national data benchmarking, hospitals can

analyze the diverse physician preference patterns, identify waste, and opportunities for

cost savings (Goodroe, 2010). In addition to benchmarking, a detailed analysis including

“cost each day per patient, supply costs per adjusted patient discharge cost per case”

(Tyson, 2010) means if the patient stayed longer, there is a cost increase; shorter supply,

a cost decrease.

The following is a chart of the top 4 MS-DRGS and the annual case cost, and loss per

year: on pgs. 29-30

Table 1

Procedure

Average

Cost

Average Paid by

Medicare

Loss per

Procedure Annual Loss

Major Joint Replacement $19978 $16152 $-3826 $-1637528


25

Hip and Femur Procedures $18074 $14232 $-3842 $-456300

Simple Pneumonia and

Pleurisy $9889 $8271 $-1618 $-614840

Nutritional and Metabolic

disorders $10455 $7095 $-3360 $-483840

Source: Preparing for the new landscape of payment reform Patricia Tyson

In the above table, it is clear that the average cost is less than the payment received

from Medicare to cover procedures. It is important for hospitals to undertake

partnerships with physicians and personnel to assess all steps needed clinically and

appropriateness dependent on procedure (Tyson, 2010). By engaging physicians and

involving them in the education on the clinical implications, and the expenditure

legislation involved with the implementation of The Health Care Reform Act, they will

become aware of their role, and the hospitals role in ensuring that their hospital is not

penalized for not complying with the guidelines of the act (Tyson, 2010). Eventually,

hospitals, and ultimately physicians will be held accountable for excess spending, and

penalized for using products for procedures that are not standardized or contain non-value

added waste. As annotated in Table 1 above, if cost exceeds payment from insurance

agencies, then the hospitals will not only lose revenue, but they will pay a penalty for not

performing to the standards set forth by the Health Care Reform Act. Some of the key


26

ways to realize the savings during a merger, consolidation, or partnership is to make the

most of the newly combined purchasing power that results from the unification. This

can be achieved by re-negotiating more aggressive contracts with vendors, using

increased spend and industry benchmarking tools as leverage for decreased pricing,

making an increased effort to standardize physician preferences items, and re-negotiating

current service contracts (Tyson, 2010).

Many vendors are reluctant to reduce pricing, while some will automatically

acknowledge the consolidation. In both cases, there are ramifications and difficulties that

can arise. If vendors are slow to implement reduced pricing, savings will take longer to

accomplish. On the flip side, if vendors move too fast, “jumping the gun” can cause

extreme invoice discrepancies, mass confusion, and possibly increased pricing. In order

to synchronize a smooth transition, the supply chain must have a plan of implementation

and strategy that not only involves the supply chain professionals, but the vendors as

well.

Vendors are aware that the consolidations merging supply chains have an effect on

their sales strategy. In an article published in January of 2012, author Janet Spirer, co-

founder of Sales Horizon Sales, remarked that the landscape of sales is changing with the

increase of mergers and acquisitions (Spirer, 2012). She urges medical sales

professionals to take steps reduce duplication, capture larger market shares, improve

negotiation positions, and obtain a better bond rating (meaning that increasing sales to a

more secure hospital will increase credit worthiness of the company) (Spirer, 2012).


27

Hospitals are often located in different sales territories, states, or jurisdictions; this

becomes a problem for local vendor representatives due to sales tracings and “credit” for

sales. Spirer suggests that companies should be open to exploring the use of the national

account sales model. This model will allow vendors to develop a relationship with the

organization, and secure sales “across the company’s portfolio” (Spirer, 2012).

Translating clinical value into economic value with doctors is also important. Doctors

need to not only know the clinical aspects of the products, but the business or financial

impact of the products on their organizations (Spirer, 2012). Cost reduction will require

strategic planning and re-thinking entire processes (Goldstein, 2010). Dale Locklair, vice

president of procurement and construction for McLeod Health stated the following:

In the battle to reduce costs, many healthcare organizations have

mistakenly focused on lowering the price of goods as the primary means

of creating value, but consider, for example, that products used in giving

an IV infusion may be the cheapest products available, but also may

contribute to elevated occurrences of costly and potentially deadly blood

stream infections. It’s evident that we need to shift our thoughts from

price to value. We are working to measure cost in correlation with

outcome for both the physical health of our patients, and the financial

health of our organization. (Smith, 2011)


28

If physicians are involved in the evolution, and are fully educated in the implications of

the Health Care Reform Act, they will be more willing to standardize or re-evaluate

current practices and champion cutting costs themselves (Goldstein, 2010).

Standardization combined with industry benchmarking should result in increased profit

and less supply cost. There are two standard types of product contracts: they are GPO

(Group Purchase Organizations) contracts, and private or local contracts. Approximately

96% of acute care hospitals utilize Healthcare GPOs, and nearly 72% of the purchases

made are contracted through a GPO (Unknown, Wikepedia, 2012).

Health care GPOs and Benchmarking

A GPO aggregates the purchasing volume of its members for various goods and

services and develops contracts with suppliers through which members may buy at

group price and terms if they choose to. GPOs typically provide contracted

discounts on medical supplies, nutrition, pharmacy and laboratory. There several

different types of Healthcare GPOs, and help can be packed many different ways,

and provide contracted discounts on medical supplies, nutrition, pharmacy, and

laboratory (Unknown, Wikepedia, 2012).

One of the services often offered by larger GPOs is benchmarking. Benchmarking allows

member of the GPO to view what other GPO member hospitals of their size are paying

for products. The view is “blind” meaning that they have view of the products and


29

pricing dependent on purchase aggregation or “tiers”, but not a view of the organization

that is receiving the pricing. Hospitals and IDNs can use this information as a

negotiating tool for analysis and contract negotiation with vendors. The more aggregated

spend of a product or category of products, the more purchase power the hospital has, and

the higher tier they can achieve. By adding new hospitals to their organization, their

overall spending can increase on a product, or line of products and can ultimately mean in

increase in their tier, reducing pricing. There are many companies that offer Health care

GPO services. The top Health care GPOs, based on Adjusted Present Value (APV), are

MedAssets, Premier Inc., and Novation LLC. MedAssets APV is worth over 45B

dollars, Premier Inc. APV is valued at 43B dollars, and Novation is not far behind with

40.1B APV (Unknown, GPO Facts and Figures, 2012). Healthcare supply chains rely on

GPO contracts for many products, but they also may have the option to pursue private or

local contracts with vendors if both parties can come to agreement on contractual terms

and conditions, and both parties find benefit in a private agreement. This agreement

usually cannot be disclosed to GPOs, therefore it is not available for others to use as a

benchmarking tool. Vendors often attempt to include contractual stipulations of non-

disclosure pricing in agreements or contracts, as well as cancel their GPO relationship to

avoid GPO price benchmarking possibilities.

In February of 2011, one the nation’s top device suppliers severed their GPO

relationship with two of the top Health care GPO services, Novation LLC and Premier

Inc. This caused quite a disruption in the Healthcare Material Management community.


30

In a letter to Medtronic, Novation LLC “expressed their extreme disappointment in

Medtronic, and the actions they took” bear (Unknown, Does Medtronic action signal a

shift?, 2011), and 16 major health systems supply chain executives signed the letter in

agreement. Premier Inc. referred comments to the Health Industry Group Purchasing

Association (HIGPA) that stated, “Medtronic’s decision puts greed ahead of patients, and

is nothing short of an attack on American’s hospitals. Without the ability to benchmark,

hospitals would be left to negotiate with device makers that will now be able to charge

whatever local markets will bear (Unknown, Does Medtronic action signal a shift?,

2011).” Due to this action by Medtronic, many healthcare industry professionals worried

that more suppliers would follow suit, and opt out of GPO contracts. Some vendors, and

larger IDNs and hospital networks question the fees charged by GPOs and if their

organizations will benefit from belonging to a GPO. Vendors pay fees to the GPO when

customers purchase through GPO contracts with the implementation of the Healthcare

Reform Act, they will be required to also pay a 2.3% federal device tax. A sensible

solution to vendors like Medtronic, is to eliminate GPO fees in order to help absorb the

additional taxes that will be required by the government in 2013 (Unknown, Does

Medtronic action signal a shift?, 2011). Larger IDNs and hospital networks have

enormous purchasing power and leverage due to spend. Many IDNs and hospital

networks have outgrown their GPO tier structures, and may believe that private contracts

may be more beneficial to the organization as a whole. Others may decide to form a

partnership, as did the three hospital networks in the mid-Atlantic region discussed


31

earlier. One of the differences between this partnership, and a private contract is that the

pricing may still be available for benchmarking, while a private or local contract would

not. In addition to the fore-mentioned ways to reduce pricing, if hospital systems can

compromise and agree on standardization of products, even greater savings can be

accomplished (Unknown, Does Medtronic action signal a shift?, 2011). Adoption of

“organization-wide standardization, based on a unified information technology platform,

will both add to the bottom line and make future mergers and acquisitions easier to

implement (Goldstein, 2010).”

Summary

With the enactment of the Health Care Reform Act many changes occurred

throughout the Health care industry , and those industries that support it. If The Health

Care Reform Act is kept as it is today, there will be many changes yet to come.

Throughout history, Health care reform has played a major part in political campaigns,

and considering that 2012 is an election year, it will no doubt play a large part in the

presidential election.

Many authors cited believe that Health care reform is needed, and have warned those

in the industry that preparation is the key to a successful transition (Mulvany, 2010).

Whether or not the Health Care Reform Act is repealed, many also believe that the

wheels are already in place to create a more efficient, cost conscious Health care industry

(Thomas & Abelson, 2012).


32

Methodology

In an effort to gain more insight and knowledge into Healthcare industry and healthcare

materials management, the author uncovered that the Healthcare Reform Act had


33

significantly changed the landscape of the Healthcare industry. Before initiating this

project, the author knew absolutely nothing about healthcare materials management, and

was extremely thirsty for information.

The author collected data from many different sources, including websites, books,

publications, magazines, and journals. In the beginning of the research, the key words

used were: Healthcare Supply Chain Management, mergers, and acquisitions. Through

further research and discovery, the author realized there was much more involved, and

expanded the key words list to also include: partnerships, healthcare reform, physician

preference items, benchmarking, due diligence, Medicare, Medicaid, consolidations,

GPOs, contracting, private contracts, VHA, cost saving strategies in healthcare, Federal

Trade Commission’s healthcare concerns, transformational, healthcare cost reductions,

and non-profit healthcare.

The sources chosen are greatly diversified and include industry professionals, case

studies completed by reputable healthcare organization leaders, federal government

official court documents, and healthcare industry professional insight.

The author chose to organize a survey to accomplish a “blind” analysis of actual

perceptions of survey participants due to the sensitive political nature of the subject. The

author also felt that healthcare professionals and industry experts would most relate to the

questions compiled as a result of the research gathered on the subject. Having insider

knowledge in regards to the healthcare industry and firsthand knowledge of healthcare


34

supply chains would also benefit survey participants in accurately expressing their

opinions in regards to the survey questions. The author chose to use Facebook, and

Linked-In networks to publish the survey links for participant. The author is a member of

various Healthcare Executive Networks and Healthcare Supply Networks sponsored by

Linked-In: www.linkedin.com.

The tool used to create the survey is Survey Gizmo at www.surveygizmo.com. The

author opened a free student account that enables survey creation, various posting tools,

data analysis, and data consolidation tools. The questions were developed in order to

capture the strong opinions of the survey samples, and did not allow for additional

statements or comments. The author did collect statements that resulted from the survey

that were posted as comments to the posting of the survey, but were not included in the

body of the survey form (comments can be found in Appendix C).

The questions were developed in conjunction with the subjects found to be important in

the research, to get a better understanding on the true opinions of the professionals that

participated in the survey.

The survey questions and available answers are as follows (Available Selection: “Yes”,

“No”, “Maybe”, “I don’t know”).

http://www.surveygizmo.com/

http://www.linkedin.com/


35

Health care reforms Impact on Materials Management

1) Do you feel that that Health care reform has changed the health care industry already?

2) Has your organization been greatly affected by mergers, acquisitions or new

partnerships in the last year?

3) Do you feel Healthcare reform is necessary?

4) Are you familiar with the Healthcare reform initiatives?

5) Do you feel that your organization is prepared for the Healthcare initiatives set forth

the Healthcare act?

6) Does your organization have an organized time line regards to the Healthcare

initiatives?

7) Are you employed in Materials Management/Logistics, or work closely with Materials

Management at your organization

Available Selection: Yes, No, Work Closely

8) Do you feel that Physician Preference Item (PPI) have driven the need for Healthcare

Reform?

9) Given that supply chain is where most initial savings is found during mergers,

acquisitions and/or partnerships, do you believe that it should be looked at with more

scrutiny and thoroughly researched before finishing due diligence?


36

10) Do you believe Healthcare reform should be rescinded?

Data Review

The author received a healthy 113 responses from the survey posted on two sites:

www.facebook.com and www.linkedin.com. Two responses were generated from

www.facebook.com, and 111 were generated from www.linkedin.com. At first the


http://www.facebook.com/


http://www.facebook.com/


37

responses were sporadic, but the author believes that due to renewed interest in this

subject in the media and political campaigns, and good timing in reposting the survey,

these factors helped in generating more interest. The survey was posted three times on

each site. The survey was posted for the first time on December 15th, 2011, the second

time on January 11th, 2012, and the third time on March 30th, 2011. The first post

generated 12 responses. The second post generated 17 responses, and the third post

generated 84 responses (at the height of the Supreme Court news).

The author believes that the third posts extraordinary amount of responses was a

direct result of the current newsworthiness of the subject of Health care reform. On

March 30th, 2012 Congress held a special session to discuss the Health Care Reform Act,

and determine the constitutionality of the Act.

Survey Results:

1 Answer 6 Answer

Yes77.90% 88 Yes

44.20%

50


38

No 8% 9 No33.60%

38

Maybe 9.70% 11 Maybe 7.10% 8I don't know 4.40% 5

I don't know 15%

17

2 Answer 7 Answer

Yes44.20% 50 Yes

73.50%

83

No50.40% 57 No

20.40%

23

Maybe 1.80% 2Work Closely 6.20% 7

I don't know 3.50% 4

3 Answer 8 Answer

Yes79.60% 90 Yes

31.90%

36

No 4.40% 5 No34.50%

39

Maybe15.90% 18 Maybe

21.20%

24

I don't know 0% 0

I don't know

12.40%

14

4 Answer 9 Answer

Yes80.50% 91 Yes

83.20%

94

No 6.20% 7 No 4.40% 5


10.60%

12

Not applicable 0% 0


5 Answer10 Answer

Yes30.10% 34 Yes

32.70%

37

No34.50% 39 No

49.60%

56


13.30%

15


39



Data Analysis:

Change: Question 1 asked if survey subjects felt that Health care reform had changed

the health care industry already. The results revealed that 88 out of the 113 participants

believed that the healthcare industry had already changed due to healthcare care reform.

Almost in parallel with this finding, Question 3 asked if the survey participants felt that

Health care reform was necessary, 90 of 113 respondents agreed that it is necessary.

Comparing the survey questions, the author concludes that the respondents believe that

the Health Care Reform Act has already begun to affect the Healthcare Industry, and a

significant amount of the responders believe that Healthcare Reform is necessary.

Mergers, acquisitions and partnerships: Question 2 asked respondents if they had

been greatly affected by mergers, acquisitions, and partnerships. The results from this

question were nearly split in half. Of the respondents 50 believed that they had been

affected by some type of consolidation or partnership, while 57 said they had not. If the

author was to use this as a representation of the healthcare industry as a whole, this would


40

translate to nearly 50% of the industry being affected by mergers, acquisitions, and

partnerships.

Necessity: Question 3 asked if respondents felt if Health care reform was necessary.

The respondents overwhelmingly agreed that reform was necessary. Nearly 90 of the 113

respondents felt it was necessary; five did not feel it was necessary, and 18 believed it

might be necessary. This question is in direct competition with Question 10, which asks

the respondents if they believe Health care reform should be rescinded. The author was

surprised in regards to the answer to Question 10, due to the answers posted for question

3. Question 10 resulted in 37 out of the 113 respondents answering No; 37 responded

Yes; 15 responded Maybe; and five responded “I don’t know”. Due to the positive

response in regards to the support of the Health Care Reform Act and the split response to

rescind Health care reform, the author made the deduction that Health care reform is

wanted by many, but not in the form it is today by some respondents.

Familiar with Initiatives: Question 4 asked if respondents are familiar with Healthcare

Reform Initiatives. A strong majority of 91 of the 113 participants were familiar with the

initiative, 15 thought that they may know the initiative, while only seven stated that they

did not know or were not familiar with the initiatives. In comparison with Question 7, 90

of the participants are employed in Materials Management/Logistics or work closely with

Materials Management. The author believes that there is a direct correlation between


41

those that work in Materials Management and those that do not in regard to the

Healthcare Reform Initiatives and their knowledge of them. Materials Management

personnel seem to be more directly involved with the implications.

Preparation: Question 5 asks respondents if they believe that their organization is

prepared for the Healthcare Initiatives set forth in the Health Care Reform Act. Of the

respondents, 39 out of 113 answered No, 34 answered Yes, 34 answered maybe, and six

answered “I don’t know”. This translates to only 34 out of 113 that are confident that

their organization is ready for Health care reform, even though it has already begun.

Question 6 asked if they believed that their organizations had a timeline in regard to the

health care initiatives. Slightly less than half or 50 out of 113 stated Yes, 38 stated No,

eight stated Maybe, and 17 stated they did not know. If it is understood that Health care

reform has begun, and only 35 out of 113 organizations are ready for it; and only 50 out

of 113 are aware of the full implications and timeline of health reform, then there are

many organizations that are definitely not ready for Health care reform.

Physician Preference Items: Question 8 focused on Physician Preference Items (PPI)

and whether or not they have driven the need for healthcare reform. The author was

surprised that the responses were so split: 39 out of 113 stated No, 36 out of 113 stated

Yes, 24 stated Maybe, and 14 stated “I don’t know”. Even though the results were

divided, there does seem to be some question to whether or not these items influence


42

increased costs in the Supply Chain. The “Maybe” and “I don’t know” categories make a

combined total of 38 respondents that are really not sure if these items influenced the

need for healthcare reform.

Supply Chain Importance: In Question 9, the respondents are asked if the supply chain

is where most initial savings are found during mergers, acquisitions, and partnerships, do

they believe that it should be looked at with more scrutiny and thoroughly researched

before finishing due diligence? This question generated the most responses for a single

response than any other in the survey: 94 of the 113 respondents answered Yes to this

question, only five responded No, 12 answered Maybe, and two answered “I don’t

know”. To the author, this near unanimous opinion makes a statement to those that are

initiating the “deals”. The Supply Chain is often an after-thought, after the merger or

after consolidation begins, and then the real work begins, even though most of the money

sought after is money that can be generated from Supply Chain saving initiatives.

Rescind or not?: Question 10 asked participants if they believed that Healthcare reform

should be rescinded. This question is one of the most contentious questions in the whole

survey at this very moment in time (spring 2012) due to the Congressional debate to

possible rescind the Health Care Reform Act and the intense passion on both sides of the

Obamacare debate: 56 out of 113 answered No, 37 answered Yes, 15 said Maybe, and

five answered “I don’t know”. While slightly more than half want to keep it, those that


43

wanted to definitely repeal it (with the Maybes), the author believes that many do believe

that there is still a need for Health care reform, just not the Health care reform that

currently exists.

Conclusion

Historically, Health care reformation has been a very political issue (as it is today) but

it has evolved significantly since its inception into the national debate in 1912 by former

President Teddy Roosevelt. Today’s Health reform has completely transformed the

Health care industry since its controversial implementation in 2010. Throughout this

paper, health care executives and experts, medical retail executives, insurance executives

and GPO leaders have all expressed the changes that have occurred since the Health Care

Reform Act was signed into law by President Barack Obama.

Mergers, acquisitions, and partnerships have drastically increased since the

implementation of the Act, and the research and documentation have shown that the

changes are not coincidental. Many industry experts not only predicted the rise in


44

mergers and acquisitions but they have extensively researched and reported on the

possible repercussions that Health Care Reform Act would have on the Health Care

Industries, and all other peripheral industries that support it.

Prior to healthcare reform, the U.S. Health Care system was set up as a volume-based

system with little concern for outcome or readmission rates. Now, with the health care

initiatives partially in place, quality over quantity is making sense. The health care

industry is taking action, insurance providers are preparing policies, and vendors are

taking notes. Even as the Supreme Court Justices scrutinize and review the Health Care

Reform Act, many are convinced that healthcare reform is not only needed but long

overdue, “Many hospital executives and insurers say big changes in how care is being

delivered will continue regardless of the law (Thomas & Abelson, 2012)”

It is human nature for individuals, and organizations to initially refute change of any

form. Change is difficult and requires evaluating current procedures, discovering areas

that need improvement, training personnel on new processes, and implementing new

policies and procedures. The author revealed that many survey responders acknowledge

that change and health care reform is needed, but the question still remains, to what

extent?


45

Statement of Learning

February 2011 was a very busy month for me. I retired from the U.S. Navy after 22

years as a Logistics Management Specialist. I accepted a position as a Materials Consultant

at a local hospital network, and began my quest for an Independent Learning Project in

Management (MMG).

My years in the Navy provided me the skills needed for procurement and logistics as well

as the leadership and flexibility needed in any position, but the Navy did not teach me

everything I needed to know about health care, and “real world” logistics. I quickly

discovered this my first week on the job.

After 22 years of knowing how to do everything, it was hard starting over and accepting

that I did not have all the answers and I had so much to learn. I started researching, taking


46

notes, and observing my management and co-workers--soaking everything up like a sponge,

wanting to learn more. Then, just two short weeks later, I was asked by my professor,

“What would you like to do your ILP on?”

I decided that the title of my ILP would be “Health Care Mergers and Acquisitions, and

their effects on Healthcare Supply Chain Management”. I began researching and compiling

data from everywhere, relating articles to my job, and discovering the intricate details of

Health care supply chain Management. After about four months of research and study, I

discovered that I was missing a big part of the picture, The Health Care Reform Act. I did

not truly realize, until that moment, the implications that the Act not only had on Health

Care, but also how important it was to include it as a main focus of my paper.

In addition to discovering the importance of the act, I also discovered I knew absolutely

nothing about the Health care industry . I never had to pay a hospital bill, so the cost of a

doctor visit was never a concern for me, but there are millions that do not have that luxury.

Doing research for this project opened my eyes to the dilemma that many health care

organizations face. Without Health care reform, supply prices would continue to rise and

eventually, will be unaffordable for everyone except those that provide the supplies, and/or

are already wealthy. It also surprised me that physicians often receive incentives or perks

for championing vendor products. I found this situation particularly disturbing; in the

purchasing community we are strictly forbidden to take anything from a vendor because it is

considered to be a “conflict of interest” or un-ethical. I found this site very interesting:

http://projects.propublica.org/docdollars/.

http://projects.propublica.org/docdollars/


47

Throughout my research, cost savings seems to boil down to standardization and volume

purchasing possibilities that occur during mergers, acquisitions, and partnerships. I could

see where this would be a problem if physicians have a particular interest or affiliation with

a particular company or vendor.

It is hard to express in words how much I have learned from this project, and how much I

learned about my job--each and every time I read a new article in regard to the health care

industry. I believe this paper has not only helped me to grown scholastically, but in my

current positions as well. The best decision I have ever made was basing my paper on my

job. I have so much more insight into the everyday workings of the health care supply chain,

and its intricacies.

I personally do believe that Health care reform is needed. The initiatives and positive

changes that have been made in the Health care industry have been amazing. While

completing this paper, just one day prior to submission, the Supreme Court is deciding

whether or not to repeal the Act. I feel this decision would be devastating to the Health Care

and Insurance industry.


48

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Appendix

A. Healthcare Reform Time-Line

June 2010

-Adults with pre-existing conditions became eligible to join the high-risk pool.

July 2010

-President Obama established (within the Department of Health and Human Services) a

council known as the National Prevention, Health Promotion and Public Health Council


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to develop a strategy, with the Surgeon General being appointed as the council’s

Chairperson.

September 2010

-Lifetime dollar limits prohibited; no longer permitted to be imposed on insurers.

-Dependent children under the age of 26 are permitted on parents’ insurance policies.

-Preventative care co-pays or deductibles are no longer required.

-Insurance companies no longer allowed dropping policyholders for getting sick.

-Fraud detection methods implemented.

-New website established by Secretary of Health and Human Services to provide

consumer insurance information.

January 2011

-The Centers of Medicare and Medicaid Services develops the Center for Medicare and

Medicaid Innovation to manage testing of payment and delivery methods.

January 2012

-Employers must disclose value of insurance benefits.

-New tax reporting initiatives to prevent tax evasion by corporations and individuals.

-January 1st, 2014

-Insurers not allowed to discriminate against individuals based on pre-existing medical

conditions.


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-Imposition of a $95.00, or up to 1% penalty (whichever is greater) for those individuals

that do not secure insurance.

-No annual spending caps for insurance companies.

-Expand Medicaid eligibility.

-Tax credit for Two years for small businesses that implement insurance coverage for

Full Time Employees.

-Imposition of a $2000.00 per employee tax penalty if the company does not offer health

insurance.

-An increase of tax-free Flexible Spending accounts (FSAs) to $2500.00.

-Chain restaurant required to display caloric content of food on all menus.

B. Statistics

Health Care Reform Acts Impact on Materials Management

1) Do you feel that that Health care reform has changed the health care industry already?


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2) Has your organization been greatly affected by mergers, acquisitions or new partnerships in the last year?

3) Do you feel Healthcare reform is necessary?

4) Are you familiar with the Healthcare reform initiatives?


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5) Do you feel that your organization is prepared for the Healthcare initiatives set forth the Healthcare act?

6) Does your organization have an organized time line regards to the Healthcare initiatives?


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7) Are you employed in Materials Management/Logistics, or work closely with Materials Management at your organization?

8) Do you feel that Physician Preference Item (PPI) have driven the need for Healthcare Reform?

9) Given that supply chain is where most initial savings is found during mergers, acquisitions and/or partnerships, do you believe that it should be looked at with more scrutiny and thoroughly researched before finishing due diligence?


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10) Do you believe Healthcare reform should be rescinded?


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C. LinkedIn Comments

1. Michael Goodson, CMRP: “The decline in hospital revenues, the increase in uncompensated care and the rise in the cost of medical supplies are creating new challenges to either find opportunities to increase revenue or decrease cost. Supplies and labor are the two significant contributors to cost and materials costs are fast approaching labor costs while operating margins shrink to almost unsustainable levels.

Healthcare reform is forcing facilities to find the information for making fact based decisions as to whether they are delivering the best outcomes in the most cost effective manner.

For the sake of simplicity, if margins were, for instance, 5%, it would require $2M in increased revenue to provide the same financial benefit as a $100K reduction in supply chain costs (which goes directly to the bottom line). Certainly, one of the greatest opportunities to lower the cost of healthcare can come directly from the optimization of the healthcare supply chain.

While many hospital materials management departments are managing a few hundred thousand dollars in supplies in perpetual inventories and PAR areas, supplies valued in the millions of dollars may be found in operating rooms being managed by clinicians instead of supply chain professionals employing industry standard and leading practices. Excess inventory in the operating room and interventional radiology lab buys a lot of customer satisfaction for an unnecessarily high price.

Hospitals that develop proficiencies in identifying opportunities for optimizing their supply chain and monitoring the efficacy of these improved processes with quantifiable goals and ongoing monitoring of appropriate metrics are succeeding in removing unnecessary costs.

Although many facilities have a value analysis team and process for vetting supplies, these various processes don’t always examine an appropriate fit of the supplies to the required functionality. Efforts to monitor cost and clinical outcomes can be an effective tool to begin discussions that present further opportunities. An effective value analysis team should also retroactively examine supplies currently in use, beginning with the most expensive DRG s and working down the list.

Physician preference items – those items that are requested by physicians to be purchased from specific suppliers - are recognized as one of the primary drivers of increased supply cost. Only with executive sponsorship can an environment can be created to examine the rationale for more efficient management of physician preference

http://www.linkedin.com/groups?viewMemberFeed=&gid=1928206&memberID=5010564&goback=.amf_1928206_30026590


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items and for making cost effective choices that maintain quality clinical outcomes.

Hospitals cannot remain in business if they lose money when they perform procedures. I’m confident that physicians who insist on specific products from specific vendors genuinely believe that they are creating value for both the patient in terms of the clinical outcome and for the facility in terms of the reimbursement exceeding the cost. An examination of cost and required functionality in relation to clinical outcomes provides the information and the visibility to confirm that these choices are cost efficient and appropriate for patient outcomes.

Healthcare reform should motivate facilities to acquire individuals with skills such as facilitating teams of stakeholders to analyze business processes, recognize opportunities, craft, implement and continuously monitor their solutions to keep them moving toward attainment of their defined cost reduction goals”. Retrieved from www.linkedin.com in response to survey posted.

Yolie Turner: “The Healthcare Reform I believe will adversely impact more so those hospitals in the underserved areas. Especially those who have fallen under the spell of supply/equipment ala carte of a physician's needs when in actuality couldn't afford it then. Those days are practically over or reduced drastically. Only physicians who participate in being part of the solution especially in hospitals that are disproportionate should partner with materials management in making clinical supply/equipment evaluations that will bring continuity, quality, and the best return outcomes as possible. As well as GPOs seeking, accepting, and mentoring more local and minority suppliers to help build socially responsible purchasing. This I believe will not only keep jobs here but will also promote manufacturing here as well. Thus, I believe that all hospitals will not survive but those that do will be because they have been forced to step up their performance outcomes and will be chosen by their patients and those patients from those hospitals that have fallen.” Retrieved from www.linkedin.com in response to posted survey.


http://www.linkedin.com/groups?viewMemberFeed=&gid=1928206&memberID=16461207&goback=.amf_1928206_30026590



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D. Glossary of Abbreviations

ACO-Accountable Care Organization

CMS-Center for Medicare and Medicaid

FTC-Federal Trade Commission

GPO-Group Purchase Organization

HACS-Hospital Acquired Conditions

HCN-Health Care Network

HHS-Department of Health and Human Services

HIGPA-Health Industry Group Purchase Association

HMO-Health Maintenance Organization

IDN-Integrated Delivery/Distribution Network

MS-DRG-Cost allocation method used by Medicare to determine payment amount

PPS-Perspective Payment System

Final Paper Health Care Reform 2012

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